Internal Liquidity’s Value in a Financial Crisis

Abstract

A classic question for U.S. financial firms is whether to organize themselves as entities that are affiliated with a bank-holding company (BHC). This affiliation brings benefits, such as access to liquidity from other affiliated entities, as well as costs, particularly a larger regulatory burden. This post highlights the results from a recent Staff Report that sheds light on this tradeoff. This work uses confidential data on the population of broker-dealers to study the benefits of being affiliated with a BHC, with a focus on the global financial crisis (GFC). The analysis reveals that affiliation with a BHC makes broker-dealers more resilient to the aggregate liquidity shocks that prevailed during the GFC. This results in these broker-dealers being more willing to hold riskier securities on their balance sheet relative to broker-dealers that are not affiliated with a BHC.

To view post: https://libertystreeteconomics.newyorkfed.org/2024/04/internal-liquiditys-walue-in-a-financial-crisis

Keywords: broker-dealers, shadow banking, liquidity risk, repo market

JEL Classification: G2, G21, G23